Superior economic and profit growth
                                                                                                                                                                                     U.S. STOCKS   and fiscal stimulus provide an edge over

                                                                                                                                                                                                   developed international equities.

                                                                                                                                                                                                   Economic growth tailwind and attractive
                                                                                                                                                                                                   relative valuations compared with growth
                                                                                                                                                                                                   may help buoy value stocks.
                                                        The #1 Bestselling Finance Book

                                                       What to                                                                     NEW & NOTEWORTHY                            CYCLICAL STOCKS
                                                                                                                                                                                                   Solid economic growth may support

                                                       when you re
                                                                                                                                                                                                   economically sensitive sectors.

                                                                                                                                      Your book club may thank you for                             Strong growth, attractive valuations, and
                                                                                                                                                                             EMERGING MARKETS
                                                        volatility                                                                     these recommendations in 2019                               potential U.S.-China trade agreement may
                                                                     1st EDITION                                                                                                                   help emerging market equities outperform.
                                                        T    he all-in-one guide that
                                                             explains everything you
                                                        need to know — and can’t
                                                        wait to find out — about the                                                                                         INVESTMENT-GRADE      Economic growth may help credit-sensitive
                                                        amazing stock market, from
                                                        bulls to bears and beyond.
                                                                                                                                                                              CORPORATE BONDS      bonds; added credit risk provides
                                                        Completely New & Revised
                                                                                                                                                                                                   incremental yield.

                                                                                                                                                                             MORTGAGE-BACKED       Yield benefit relative to rate risk remains
                                        WHAT TO EXPECT WHEN                                                                                                                        SECURITIES      attractive among high-quality options.
THE POWER OF POLICY                    YOU’RE EXPECTING VOLATILITY                      GOOD TO GOOD

The Federal Reserve is expected to      Market volatility will likely persist in          Despite periodic slowdowns, business
slow its pace of interest rate hikes    2019, as investors digest the many                spending was solid in 2018 and                                                                           Tax reform benefits starting to fade and cycle
                                                                                                                                                                                    SMALL CAPS
next year, while fiscal policy should   forces impacting the economy, interest            is expected to remain so in 2019.                                                                        is aging, but domestic focus may help early
remain supportive of economic and       rates, and corporate profits. Focusing            Business spending remains a key                                                                          in 2019.
profit growth. Uncertainty regarding    on the fundamentals and remembering               factor supporting economic growth                                                                        Offer some potential diversification while
trade policy remains a risk, although   the importance of diversification will            as we look for this cycle to elongate.                                            HIGH-QUALITY BONDS     avoiding the rate risk of long-term bonds.
we expect an eventual resolution.       be key to navigating any volatile times.
                                                                                                                                                                                                   Still potentially attractive for strategic
                                                                                                                                              CLASSICS                              BANK LOANS
                                                                                                                                                                                                   investors, but high issuance, weaker
                                                                                                                                                                                                   investor protections raise some concerns.

New for 2019:
                                                                                                                                    Don’t count out these timeless tales;                          May be supported by further economic
                                                                                                                                     these investments should provide         HIGH-YIELD BONDS     growth, but we prefer a combination of
                                                                                                                                      a solid background to portfolios                             equities and high-quality bonds.

                                                                                                                                                                                                   Less economically sensitive sectors may
                                                                                                                                                                                  U.S. DEFENSIVE
                                                                                                                                                                                         STOCKS    offer lower return potential amid solid
                                                                                                                                                                                                   economic and profit growth.

                                                                                                                                                                                                   After a sustained period of strong
                                                                                                                                                                                GROWTH STOCKS
                                                                                                                                                                                                   performance compared with value, the
                                                                                                                                                                                                   growth stock rally may be due for a pause.

                                                                                                                                          OUT OF PRINT                                DEVELOPED    Growth in Europe has slowed while political
                                                                                                                                                                            INTERNATIONAL STOCKS   challenges are rising.

                                                                                                                                   Might have to wait for                            DEVELOPED     Valuations remain very rich and declining
THE THREE HABITS OF                                                                       HOW TO GAIN PROFITS                      the next edition; these                       INTERNATIONAL     central bank accommodation may create
HIGHLY EFFECTIVE GROWTH                RATES: THE STORY OF BONDS                        & INFLUENCE STOCKS                                                                           BONDS      a challenging environment.
                                                                                                                                     investments aren’t
Consumer spending, business             A rising rate environment may                     Expectations for still solid corporate
                                                                                                                                     gaining traction yet                                          With rates expected to rise, the
investment, and government spending     prove challenging for bonds, and we               profits and steady economic growth                                                   LONG-TERM HIGH-
                                                                                                                                                                                 QUALITY BONDS     diversification benefit does not adequately
should provide continued support for    expect flat returns for the Bloomberg             support our forecast of 8–10% returns
                                                                                                                                                                                                   compensate for added rate sensitivity.
gross domestic product (GDP) growth     Barclays U.S. Aggregate Bond Index.               for the S&P 500 Index.
of 2.5–2.75%.

1 • OUTLOOK 2019                                                                                                                                                                                                             OUTLOOK 2019 • 2
Preface:                                                            Why You Need
                                                                                             This Book
                     Focusing on What Matters                                                As investors, we have all acquired a certain amount
                                                                                             of experience with everything the economy, markets,
                                                                                             and news headlines may throw at us. So we know
                                                                                             that market declines are normal. We know that we’ll
                                                                                             eventually have a bear market. And we know the

                                                                                                                                                        HOW TO USE
                                                                                             economy may slide into a recession before it can pick
                                                                                             back up again. But there’s a big difference between
                                                                                             knowing something and actually going through it.
                                                                                             Actually feeling it. As we also know from experience,
                                                                                             these declines don’t feel good.
                                                                                               The good news is, there are a few strategies to help
                                                                                             us navigate those potentially difficult environments:      THIS BOOK
                                                                                             FIGHT THE IMPULSES. There’s a long history of many
                                                                                             investors selling near the bottom. It can be difficult
                                                                                             to fight that urge, but a sensible plan that’s realistic   Divided into four broad chapters, a foldout
                                                                                             about risk can help you stay on course. There’s a          infographic, and interspersed with helpful
                                                                                             natural tendency to overestimate risk tolerance when       sidebars, FUNDAMENTAL: How to Focus on
                                                                                             risk is low. A realistic assessment can make it easier     What Really Matters in the Markets presents
                                                                                             to navigate challenging periods.                           our expectations and guidance for 2019 in a
                                                                                                                                                        way that’s easy to digest. Be on the lookout
                                                                                             BLOCK OUT THE NOISE. The 24-hour news cycle is
                                                                                                                                                        for these other elements as you read:
                                                                                             aimed at creating an emotional response that will
                                                                                             keep the audience tuning in. Not getting caught
                                                                                                                                                        LET’S RECAP: These boxes provide a high-
                                                                                             up in the news cycle and having sources that help
                                                                                                                                                        level summary of what we saw in 2018.
                                                                                             provide perspective can make it easier to avoid costly
                                                                                             decisions driven by strong emotions.                       BREAKING IT DOWN: These sections
                   AFTER NEARLY 10 YEARS of witnessing the U.S. economy and                                                                             present our forecasts for bonds and stocks.
                   stock market recover—and thrive—investors are starting to wonder          BELIEVE IN THE FUNDAMENTALS. Stock prices ultimately
                   if we’ve seen all this expansion and bull market have to offer. Despite   depend on corporate earnings growth. If you believe        HOW TO INVEST: Our high-level
                   the market weakness we saw at the end of 2018, at LPL Research we         that companies will continue to grow earnings, you         investment recommendations based
                   expect the U.S. economy to grow in 2019 and support gains for stocks.     implicitly believe that stocks are likely to rise in the   on our expectations.
                      Given we are a decade in and likely nearing the end of the cycle,      long term.
                   however, it is a good time to start thinking about what the next phase                                                               WHAT IF…: We also present a few of
                                                                                               This final point is arguably one of the most             our unexpected scenarios—while these
                   for the economy and markets may look like. The intention here is not      important, and one we’ll continue to emphasize
                   to start worrying or assuming the worst, but to remind ourselves that                                                                don’t represent our base case, we offer
                                                                                             throughout this edition. Our conviction in the             some situational details and consequences
                   slowdowns and declines—even recessions and bear markets—are a             fundamentals supporting the economy and
                   normal part of our market cycle. And even more importantly, if we’re                                                                 in the event of a surprise.
                                                                                             corporate profits is driving our forecasts for solid
                   prepared for any downturns, we can be better positioned to weather        GDP growth and positive stock returns. Yet, many           CHAPTER SUMMARY: We wrap it all up
                   any challenges that may be ahead.                                         positive fundamentals could be pressured by                for you.
                      That’s where Outlook 2019: FUNDAMENTAL comes in—because we             threatening issues such as trade, monetary policy,
                   could all use a handy guide when it comes to this market environment.     or global politics. As a result, we do expect to see       The 2019 edition of LPL Research’s Outlook
                   We’re here to make sure you’re prepared for what may be around the        more volatility, and continue to encourage suitable        provides you the actionable tips and
                   corner, or further down the line, and help you through it all.            investors to embrace that volatility for its potential     investment recommendations you can
                                                                                             opportunities, rather than fear it. By managing            use in 2019 and beyond. This, together
                                                                                             our emotions and staying in tune with market               with the valuable guidance of your trusted
                                                                                             signals, we can position ourselves for any                 financial advisor, can ensure that you stay
                                                                                             market environment.                                        on the right track as you seek to reach
                                                                                                                                                        your long-term goals.

3 • OUTLOOK 2019
Trade Activity Holding
                                                                                          fig.1                  Up Despite Tensions

                                                                                                                 WORLD TRADE VOLUME, YEAR-OVER-YEAR (YoY)

         chapter 1:


         Get to Know



         the Policy                                                                 2%



                                                                                          ‘12              ‘13                 ‘14              ‘15                  ‘16                      ‘17                      ‘18

                                                                                                                                                        Source: LPL Research, CPB Netherlands Bureau for Economic Policy Analysis 11/30/18

                                                                                    force for the first nine years following the
                                                                                    financial crisis. In the U.S., the Fed embarked on
                                                                                    an innovative monetary policy journey, bringing
                                                                                    its policy rate to near zero and purchasing
                                                                                    assets (known as quantitative easing, or QE).
                                                                                    Global central banks followed, culminating with
                                                                                    negative interest rates in Europe and Japan,
                                                                                    along with further balance sheet expansion
                                                                                    through their own forms of QE.
                                                                                                                                                                 T      TRADE

                                                                                                                                                               Trade will likely continue to make headlines in 2019. Though
                                                                                       Fiscal policy, set by the national government,                        tensions with China remain, progress has been made with South
                                                                                    is typically characterized by tax reform,                                Korea, Japan, Mexico, Europe, and Canada, which supported
                                                                                    government spending packages, and other                                  positive market sentiment in the third quarter of 2018. Moreover,
                                                                                    legislation impacting businesses (e.g., the                              the conclusion of the G20 summit resulted in a sort of “trade
                                                                                    regulatory environment). In part due to elevated                         truce,” whereby the U.S. and China committed to working on
                                                                                    debt levels, fiscal policy changes failed to keep                        a more lasting trade resolution within the next few months.
                                                                                    pace with monetary policy throughout the                                 Although trade threats may seem scary, trade represents a small
             WHETHER IT’S NEWLY IMPLEMENTED,                                        developed world, causing monetary policy to                              portion of the overall economy and the fiscal measures should
             removed, or amended, policy can play                                   exhaust its options over the course of a decade,                         more than offset the potential negative impact of tariffs in 2019.
             an influential role in the global economy                              particularly in the United States. Government                               Even though we expect a resolution, if it takes longer
             and markets. And since the financial crisis                            officials have begun to enact new legislation in                         than expected to reach an agreement then it’s possible that
             in 2008–09, policy’s role has become                                   response [see Let’s Recap, p.8].                                         continued trade discussions could further weigh on market
             increasingly important.                                                   As a result of these new policies, the U.S.                           sentiment. The ongoing uncertainty could have a greater
                                                                                    experienced economic growth of approximately                             impact, potentially slowing the pace of business spending or

             Defining Policy                                                        4% during the second and third quarters of 2018,
                                                                                    and projections for total annual growth nearly
                                                                                                                                                             the rate at which fiscal stimulus will take effect.
                                                                                                                                                                Despite all the attention given to tariffs, world trade has
             When we talk about policy, we’re often referring                       reach 3% for the full year, as measured by GDP.                          been growing at a steady pace [Figure 1]. Concerns have
             primarily to the balance of monetary policy as                            This positive growth came with a cost,                                risen relative to supply chains and rising input costs, yet we
             compared with fiscal policy. Monetary policy,                          however. The federal budget deficit is now at                            continue to expect any negative impact on the U.S. and global
             typically implemented by a central bank, such                          $779 billion, the largest government spending                            economies to be less than feared.
             as the Federal Reserve (Fed), was the dominant                         gap since the $1.1 trillion shortfall in 2012. If the

                 Additional disclosures and descriptions are provided on page 26.                                                                                                                                  OUTLOOK 2019 • 6
         fiscal stimulus continues to improve economic        Markets will be looking closely for hints at                         HOW TO                       As part of the shift from monetary to fiscal policy, Congress put several new policies

         growth, it would increase the tax base and help      how far the Fed may push rates in 2019. When                                                      in place to support further economic growth in late 2017.
         control the deficit; we see growth as needing to     considering the Fed’s expected peak for the                                                       2017 TAX CUT & JOBS ACT                               GOVERNMENT SPENDING PACKAGE
         be above 3% to make a meaningful difference.         fed funds rate, it’s also important to recognize                                                  • Delivered tax cuts for individual                   • Worth $300 billion over 2018 and 2019
         Consequently, we believe policy will continue        that although the Fed’s official mandates                            Although policy alone

                                                                                                                                                                  taxpayers and small businesses,
         to play an important role for the economy and        are price stability and full employment,                             should not dictate             while making corporate tax rates                    REGULATORY ENVIRONMENT
         financial markets in 2019 and beyond.                policymakers must also be cognizant of                               investment decisions,
                                                                                                                                                                  more competitive globally                           • Became less burdensome for many
                                                              financial market volatility—one reason why the                       here are some factors
                                                                                                                                                                • Included provisions to encourage                      businesses, especially in energy
                                                                                                                                   to keep in mind in 2019.
         Checking on the Fed                                  Fed’s messaging and actions have consistently
                                                              maintained this gradual path. In addition, the
                                                                                                                                                                  companies to invest in capital projects
                                                                                                                                                                  (thanks to immediate expensing) and
                                                                                                                                                                                                                        and financial services sectors

         Monetary policy may no longer be the                 Fed must be aware of the impact that higher                                                         bring their overseas profits back to the
         driving force to sustained growth, but that          rates have on the U.S. dollar’s strength, which                                                     U.S. (known as repatriation)—providing
         doesn’t mean the Fed hasn’t been busy. The                                                              FED MAY PAUSE     Rates are likely to rise,
                                                              can pressure emerging market currencies                                                             further stimulus for economic growth
         central bank has already begun to remove its
                                                                                                                 MIDYEAR           but not as quickly as
                                                              and place their economies at risk relative to                        the last two years.
         accommodative policy stance and was quite            food/energy costs, debt servicing, and capital
         active toward the end of 2018.                       flows. For all these reasons, we suspect the       FISCAL STIMULUS   There is a potential

                                                                                                                                                                                                 What to Expect
         SEPTEMBER 2018: The Fed raised its policy rate       Fed will be less aggressive than some are          IMPACT EXTENDS    for upside surprise on
                                                              projecting, and we look for the terminal fed       BEYOND 2018       economic growth; business
         with the eighth hike since beginning its climb
         from zero in December 2015.                          funds rate on this cycle to peak around 3%.                          spending may reaccelerate.                                    from Congress
         OCTOBER 2018: It began to maximize its balance                                                          SPLIT CONGRESS    This may favor different
         sheet reduction plan at $150 billion per quarter.    Chapter Summary                                    IS LARGELY        industries but economy          The 2018 midterm election resulted in the Democrats taking control of the
                                                                                                                                                                 House of Representatives and the Republicans maintaining their majority in the
         Later this month, Fed Chair Jerome Powell                                                               NEUTRAL           remains on course.
                                                              Considering the Fed’s likely path for interest                                                     Senate. We believe there are several important policy implications for investors
         stated that the U.S. economic outlook was            rates and how that may influence the               TRADE POLICY      Uncertainty remains;          to consider as we look ahead into 2019.
         “remarkably positive,” signaling that market         economy and markets, the onus is on federal        RISKS REMAIN,     impact of fiscal stimulus        With the Democrats taking control of the House, “gridlock” may in fact mean
         interest rates were going to climb, but as long      legislators to support the durability of the       BUT EXPECTING     is still likely to remain     a better sense of political balance for many market participants, as it limits the
         as inflation remained contained, interest rate       current economic expansion. The setting of         BETTER TONE       more important.               potential for the policy pendulum to swing too far in any one direction. We may
         increases would remain gradual. Should inflation     fiscal policy, whatever the party leadership,                                                      also see an infrastructure spending deal and progress on trade, which could
         pick up significantly, a more aggressive approach    is always complicated, and there will always                                                       provide further support for the markets. On the other hand, the debt ceiling debate
         would be warranted. His statement that rates
                                                              be some policies that raise concerns among                                                         may create renewed uncertainty if the Democrats attempt to roll back some of
         were still “a long way from neutral,” however,
                                                              market participants [Figure 2]. Consequently,                                                      the recent tax cuts in order to reach a deal on the federal budget, and increased
         weighed on investor sentiment and the markets.
                                                              we encourage suitable investors to base                                                            scrutiny of the administration may periodically weigh on market sentiment.
         DECEMBER 2018: As expected, the Fed closed           any investment decisions on existing                                                                  Providing some additional context, the historical performance of the S&P 500
         out 2018 by raising rates one more time to a         fundamentals supporting growth in the                                                              and U.S. economy, as measured by GDP, suggests the potential for added gains
         range of 2.25–2.5%. In an earlier speech, Powell     economy and corporate profits, rather                                                              under a split Congress and Republican president.
         had already reversed his October comments,           than acting on speculative headlines
         stating that rates were “closer to neutral,”         as the cycle matures and the 2020                                                                  HISTORICALLY, A REPUBLICAN PRESIDENT WITH A SPLIT CONGRESS
         indicating that policy would not be as restrictive   presidential election now comes
                                                                                                                                                                 IS POSITIVE FOR ECONOMY AND STOCKS
         as many had previously feared.                       into increased focus.                                                                              PERFORMANCE UNDER A REPUBLICAN PRESIDENT BASED ON CONGRESS MAKEUP
                                                                                                                                                                      REPUBLICAN CONGRESS      DEMOCRATIC CONGRESS            SPLIT CONGRESS

         Thanks to new policies,


         the U.S. economy


         has experienced

         above-trend growth.


                                                                                                                                                                         AVERAGE S&P 500 ANNUAL RETURN                           AVERAGE GDP
                                                                                                                                                                                            Source: LPL Research, Bloomberg 11/30/18; Data are from 1950–2017.

         7 • OUTLOOK 2019                                                                                                                                                                                                                  OUTLOOK 2019 • 8
Businesses Still Showing
          chapter 2:                                                                                                                                          fig.4               Plans for Robust Spending

  Master the
                                                                                                                                                                                  PLANNED INCREASE/DECREASE IN CORPORATE CAPITAL EQUIPMENT SPENDING*


  Keys to


  Economic                                                                                                                                             10%


                                                                                                                                                              ‘09     ‘10           ‘11            ‘12               ‘13                ‘14                ‘15                ‘16                ‘17             ‘18

                                                                                                                                                                                                                                                             Source: LPL Research, Strategas Research Partners 11/30/18
                                                                                                                                                                                          *Based on regional surveys. Above 0 indicates more respondents are expecting increases than decreases in the next 6–12 months.

                                                                                                                                                       Sustaining Growth                                                        Despite periodic slowdowns, business
                                                                                                                                                                                                                             spending was robust in 2018. If the trend
                                                                                                                                                       We believe a combination of positive factors may                      persists, it’s possible the cycle may elongate
                                                                                                                                                       help maintain business and consumer spending                          even further. Surveys suggest that business
                                                                                                                                                       levels that are above the expansion average.                          spending may grow at a solid rate of about
                                                                                                                                                          Overall, the combination of lower individual                       7% in the year ahead, such that signs of a
                                                                                                                                                       and business tax rates, immediate expensing                           slowdown could prove to be temporary.* High
                                                                                                                                                       provisions, repatriation, reduced regulation,                         business confidence should support increases
                                                                                                                                                       and increased government spending may help                            in capital equipment purchases [Figure 4].
                                                                                                                                                       maintain business and consumer spending                                  An increase in government spending may
                                                                                                                                                       levels that are above the expansion average. That                     provide added support. Growth in federal

                                                                                               Forecasts                                               should more than compensate for slower global
                                                                                                                                                       growth, flat housing growth, and uncertainty
                                                                                                                                                                                                                             spending over the trailing four quarters made its
                                                                                                                                                                                                                             largest contribution to GDP growth since 2010.
                                                                                                                                                       from trade and budget deficits. In addition,                          While the overall contribution may slow slightly,
                                                            REAL GDP (YoY%)                    2017             2018 (EST.)       2019 (LPL EST.)
                                                                                                                                                       consumers are supported by full employment                            increases in federal spending may continue to
                                                            U.S.                              2.2%                 2.9%            2.5–2.75%           and improving wages; as a result, we expect                           play a meaningful role in 2019.
                                                            Developed ex-U.S.                 2.4%                 2.1%                1.9%            the bulk of recent consumer spending patterns                            Inflation concerns may surface at times, and
          FISCAL STIMULUS DID ITS JOB IN 2018,              Emerging Markets                  4.7%                 4.7%                4.7%            to persist, and that consumers will continue to                       we’ll be watching wage growth. It’s hard to
          with the U.S. economy growing at an average                                                                                                  provide a solid foundation for economic growth.                       have a sustainable inflationary threat without
                                                            Global                            3.7%                 3.7%                3.7%
          of 3.3% over the first three quarters, compared                                                                                                 Fiscal incentives for business spending help                       the participation of wages. Historically, wages
          with the expansion average of 2.3% GDP            U.S. ECONOMIC DATA                                                                         lay the foundation for improved productivity,                         have needed to rise in excess of 4.0% annually
          growth. While we believe expectations should      Inflation (YoY%)                  2.1%                 2.4%            2.25 – 2.5%         which will be important in 2019, as rising output                     before the Fed has felt the need to raise rates
          be lowered in 2019, we continue to expect                                                                                                    per worker helps offset inflationary pressures.                       aggressively. With wage growth trending near
                                                            Unemployment                      4.4%                 3.7%                3.6%
          that the ongoing impact of fiscal stimulus will                                                                                              Although we expect current consumer spending                          3.0% annually, we believe there is still plenty of
          be readily apparent. We are looking for GDP       Source: LPL Research, Bloomberg, International Monetary Fund (IMF) 11/30/18; 2018 GDP      patterns to persist, job growth may start to                          time before inflation contributes to the end of
          growth of 2.5–2.75% in 2019, supported by         based on IMF estimates; 2018 inflation and unemployment based on Bloomberg-surveyed        moderate, so the burden for boosting GDP will                         this cycle.
                                                              economist consensus given year-to-date data; 2019 economic data and U.S. and global
          consumer spending, business investment, and           GDP estimates are LPL Research forecasts. Other GDP estimates are IMF projections.     fall on higher business investment, which leads                          Consequently, we look for the increase in
          government spending [Figure 3].                                                         Inflation is measured by the Consumer Price Index.   to greater productivity.                                              the Consumer Price Index to hover within the

          9 • OUTLOOK 2019                                                                                                                                                                                                  *Per the Institute for Supply Management manufacturing Purchasing Managers’ Index
range of 2.25–2.50% in 2019. Stable prices at
          this level should not alarm the Fed, which is
                                                                 Japan continues to benefit from a strong
                                                              combination of fiscal and monetary policy
                                                                                                                                                          HOW TO INVEST
                                                                                                                                                          The global expansion continues but
                                                                                                                                                                                                               What’s the
          why we expect monetary policy to continue on        initiatives, including government spending and                                              may be slowing. The U.S. likely remains
                                                                                                                                                                                                               We look at two alternative investment
          its gradual path of rate increases. If we were to   an accommodative monetary policy stance from                                                a leader among developed economies,
                                                                                                                                                                                                               strategies you can implement in a diversified
          see runaway inflation, that is when we might        the Bank of Japan. Yet structural reforms have                                              while emerging markets have upside.

                                                                                                                                                                                                               portfolio and their distinct purposes: long/short
          expect more aggressive rate hikes, which can        proved elusive and another increase in the value                                                                                                 equity and event-driven strategies.
          slow down the economy much more and create          added tax (VAT) is on tap for October 2019. As a
          the potential for a shock.                          result, the economic growth trajectory for Japan
                                                                                                                                      U.S. GROWTH         ...but is likely to slow. Rates still expected       LONG/SHORT EQUITY
                                                              may peak by midyear.                                                    REMAINS ABOVE       to rise at a moderate pace.
                                                                                                                                                                                                               We maintain a positive equity outlook for 2019,
          Taking a World View                                    EM economies continue to perform relatively                          TREND...                                                                 and therefore we think long/short equity can be

                                                              well, despite concerns around trade, currency
                                                                                                                                                                                                               an attractive option for participating in broader
          We look for the global economy, measured by         weakness amid dollar strength, and moderating                           POLITICAL           ...but growth may stabilize. Political uncertainty
                                                                                                                                                                                                               market gains while also helping to provide an
          GDP, to expand at a healthy rate of about 3.7%      demand from Europe and China.                                           CONCERNS PERSIST    is delaying structural reforms needed to
                                                                 As the world’s second-largest economy, China                         IN EUROPE...        make environment more business friendly.             additional layer of downside risk management.
          in 2019, led by growth in the U.S. and emerging
                                                              is always a major factor in EM growth. China’s
                                                                                                                                                                                                               Long/short equity can be used to complement
          markets (EM), while developed markets in
                                                              growth has slowed recently, in part due to the                          JAPAN FACES         ...from slower Chinese growth and an expected        traditional long-only equity exposure, especially
          Europe and Japan may continue to lag.
             We expect Europe to wrestle with some            uncertainties surrounding the tariff disputes                           HEADWINDS...        tax increase. Improving opportunity but 2019         when picking stocks based on their potential
                                                                                                                                                          may present challenges.                              to generate returns. A potential decrease in
          of the biggest policy issues for developed          with the U.S. If growth does not stabilize, we
                                                              expect Chinese officials to launch a variety of
                                                                                                                                                                                                               correlation—the degree to which stocks move
          markets this year. A tighter regulatory
                                                                                                                                      EMERGING            ...but China likely to slow. China and trade         together—plus greater levels of return dispersion
          environment and labor laws that restrict            programs to offer support, including funds for
                                                                                                                                      MARKETS ARE         risk remain in focus but diverse space may           (uncertainty and risk) may support a more
          business growth remain structural concerns,         lending, government spending on infrastructure,                         GROWTH LEADERS...   present opportunities.
                                                              and possibly lower corporate tax rates to
                                                                                                                                                                                                               favorable stock-picking environment. We continue
          but there are also several more immediate
                                                              incentivize investment.
                                                                                                                                                                                                               to favor strategies with a conservative or variable
          issues that may weigh on growth, including
                                                                 In the coming year, we think it will prove
                                                                                                                                                                                                               net exposure that may help add risk control, as
          Brexit, Italian budget concerns, and a rise
                                                              important to distinguish between emerging
                                                                                                                                                                                                               well as some exposure to a broad set of global
          in populism. Considering these issues, we
                                                              Asia, emerging Europe, and Latin America. In
                                                                                                                                                                                                               markets to provide more robust opportunity.
          suspect Europe may have difficulty exceeding
          2.0% GDP growth in 2019.                            emerging Asia, we remain encouraged by solid                                                                                                     EVENT-DRIVEN STRATEGIES
                                                                                                                                                                                                               Investors looking for a risk-return profile similar
                                                                                                                                      GDP growth prospects, despite slower demand                              to a fixed income portfolio but without the interest
                                                                                                                                      from China. Currency risks persist in Argentina                          rate and credit sensitivity may consider event-

                                            THE RELATIONSHIP BETWEEN                   When the economy heats up, inflation
                                                                                     starts to rise: Businesses want to put
                                                                                                                                      and Turkey, causing those nations with current
                                                                                                                                      account deficits to weigh more broadly on their
                                                                                                                                                                                                               driven investing. This strategy benefits from a
                                                                                                                                                                                                               competitive corporate-deal environment, and

                                                                                     people to work, labor gets scarcer, wages        regions. Emerging Europe has weak growth                                 tax reform may continue to support the industry
                                                                                     increase, and there’s more demand for            prospects, but Latin America, despite Argentina                          for the medium term. Historically, event-driven
                                                                                     goods and services. So prices go up.             and Venezuela, is likely to experience improved                          strategies have maintained extremely low equity-
                                                                                        As inflation rises, the Fed steps in and

                                                     & THE FED’S
                                                                                                                                      momentum coming from Brazil and Mexico.                                  like exposure, which has resulted in returns
                                                                                     raises rates. This is an effort to decrease         Emerging markets is a deceptive term, since                           more dependent on idiosyncratic deal flow
                                                                                     borrowing and encourage saving. That             different emerging market regions have widely                            rather than the broader market direction. The
                                                                                     slows down the economy.                          divergent economic drivers. Therefore, we                                ongoing U.S.-China trade dispute and regulatory

                                                     POLICY RATE                        If that happens too quickly, and
                                                                                     inflation gets too high before the Fed
                                                                                     steps in, then policymakers may react too
                                                                                     aggressively, making a policy mistake.
                                                                                                                                      look to distinguish opportunities in different
                                                                                                                                      emerging markets, viewing in order of
                                                                                                                                      preference emerging Asia, Latin America,
                                                                                                                                      and then emerging Europe.
                                                                                                                                                                                                               uncertainty represent additional risks; however,
                                                                                                                                                                                                               we believe skilled managers can add value in
                                                                                                                                                                                                               navigating these uncertainties.

                                                                                     That can slow the economy down so
                                                                                     much that it triggers a recession.
                                                                                        Right now, the Fed is keeping it              Chapter Summary
                                                                                     gradual, helping keep inflation near the         We do not anticipate a recession in 2019,
                                                                                     target for price stability as part of its dual   thanks to the fundamentally driven economic
                                                                                     mandate (along with full employment).            momentum, combined with fiscal incentives
                                                                                     The Fed wants to let the economy                 and government spending programs on tap for
                                                                                     become as strong as it can without doing         the coming year. But given the length of the
                                                                                     damage down the road. This is a delicate
                                                                                     balancing act.

                                                                                                                                                                                                                                             OUTLOOK 2019 • 12
          current expansion and where we are in the                                                                                                  has expanded, and occasionally contracted
          economic cycle, it is natural that investors                                                                                               during periods of recession. This has resulted in a
          are looking for the signs of a recession on                                                                                                trajectory that has included peaks and valleys—
          the horizon.                                                                                                                               a few higher or deeper than others—but that
             There are some late cycle indicators that                                                                                               over the long term, has advanced.

          we’re seeing now: Inflation and wages                                                                                                         But what about those bear markets (declines
          are picking up and the Fed is in tightening               W H AT I F. . .                                                                  of 20% or more) and less extreme but still
          mode (raising rates). Housing and auto sales                                                                                               meaningful corrections (declines of 10% or
          have weakened, but personal consumption,                                                                                                   more)? Bear markets and even corrections do
          business investment, and government                                                                                                        cause real economic damage, but should also be
                                                                THE RISK OF
                                                                                                A Snapshot

          spending remain solid and have not yet                                                                                                     viewed in relation to the history around them and

                                                             RECESSION RISES?
          moderated to levels that would raise concerns.                                                                                             the long-term performance of the market. Past
             At the same time, we have this large fiscal                                                                                             recessions accompanied by bear markets have
          stimulus that’s very supportive for economic
          growth. There’s never been a time when the
          U.S. had this much stimulus this late in the
                                                               There are a few scenarios that
                                                             could indicate a recession may     of Stock                                             certainly felt worse than they look here, but that’s
                                                                                                                                                     the point—sometimes our emotional reactions
                                                                                                                                                     to market changes overwhelm the broader

                                                             come sooner than we expect:
          cycle and then went into a recession. So far,                                                                                              perspective a longer-term view can provide.
          all the indicators are showing that the economy
                                                             Wages rise sharply
                                                                                                                                                     Be Calm & Prepared
          has been responding well to the stimulus
          (through the first three quarters of 2018) and     Inflationary pressures increase
                                                                                                                                                     We believe we’re in the later stages of the market
          we should see more of those effects ahead          Fed becomes more aggressive                                                             cycle, which can last several years, but we’re
          because it typically takes more time for these
                                                             Consumer spending cools                                                                 watching all the indicators to make sure we’re
          structural forces to really come into play. This
                                                                                                                                                     prepared for the next transition. To help you keep
          first push we’ve seen already is likely due to
          the confidence in these initiatives.
                                                             Business spending stalls
                                                             Trade rhetoric escalates
                                                                                                Bulls & Bears                                        perspective, here are a few things to remember
                                                                                                                                                     about bear markets, corrections, and recessions:
             In addition, although we are late in the                                           Market returns can be looked at from a lot of
          economic cycle, that period can last for a long    Leading indicators weaken          different levels: intraday moves, daily changes       Bear markets start as market corrections, but
          time and these late stages can be positive         significantly                      that bring new highs and lows, and the longer-        about 70% of the corrections since 1950 did
          for investors. We’re not seeing the excesses                                          term trends—the bears and the bulls—that              not go on to become bear markets.
          or “red flags” that would normally put us on       Although we don’t expect these     define broad market movements.
                                                                                                                                                      70% of the bear markets since 1950 have
          watch; at the same time, we are carefully          conditions, it’s prudent for          As we follow the market’s twists and turns,
                                                                                                                                                      been associated with recessions. When this
          watching for the signs that could precipitate      investors to be on the lookout.    it’s important to know what these movements
                                                                                                                                                      has happened, the start of the bear market
          those red flags eventually, such as heavy                                             mean today, as well as how they’ve played
                                                                                                                                                      has preceded the onset of the recession by
          overborrowing accompanied by overspending,                                            out over time. What does the history of
                                                                                                                                                      several months.
          so we do need to be more aware at this stage.                                         stock market returns look like? What kind of
          And of course, it’s always important to be                                            perspective does it provide? And how might            Bear markets associated with recessions
          mindful of where we are in the cycle, so that                                         that influence how we feel as we experience           typically bottom in the heart of the recession,
          we can be prepared for the next transition.                                           market advances and declines from day to day?         which means the market begins its upturn
                                                                                                                                                      while the recession is still going on.
                                                                                                Look Inside!
          We’re on the lookout,                                                                 Open this page to take a look at the history of
                                                                                                the S&P 500 Index since 1950. The blue graph
                                                                                                                                                        Eventually, this cycle will transition to the
                                                                                                                                                     next. On a total return basis, the S&P 500 has
                                                                                                                                                     taken an average of a little less than 1.5 years to

          but not yet seeing red                                                                represents the index’s total return, including
                                                                                                both price changes and dividends. Historically,
                                                                                                there’s been a long-term pattern of market gains,
                                                                                                                                                     recover from a bear market. And that’s one of the
                                                                                                                                                     main reasons to consider staying invested in the
                                                                                                                                                     market—even during downturns—to attempt to

          flags that could indicate                                                             and in fact even very volatile periods appear less
                                                                                                dramatic at this scale. This pattern is not just
                                                                                                magic—it’s had a firm basis. Stocks ultimately
                                                                                                                                                     regain the value of your portfolio as the market
                                                                                                                                                     moves from a bear market to its expansion phase.
                                                                                                                                                        Keeping a focus on the market as a whole

          an impending recession.
                                                                                                represent ownership of a small slice of corporate    and being prepared are fundamental for
                                                                                                profits, and corporate America has been able to      riding out eventual downturns and reaching
                                                                                                grow its profits over the years as the economy       long-term investment goals.

          13 • OUTLOOK 2019                                                                                    OPEN HERE!                                                         OUTLOOK 2019 • 14

                   The S&P 500 has

                   taken an average
                   of a little less than

                                                                                                                                                                                                                                        It may have
                                                                                                                                                           0.3                                                                          taken three

                   1.5 years to recover
                                                                                                                                                  1.4                                                                                   years to recover
                                                                                                                                                                                                                                        from the 2008
                                                                                                                                                                                                                                        bear market,

                   from a bear market.
                                                                                                                                                                                                                                        one of the
                                                                                                                                                                                                                                        longest periods
                                                                                                                                                                                                                                        to recover
                                                                                                                           0.2                                                                                                          shown in this
                                                                                                                                                                                                                                        chart, but those
  1,000                                                                                                                                                                                                                                 who abandoned
                                                                                                1.8                                                                                                                                     the stock
                                                                               0.8                                                                                                                                                      market missed
                                                                                                                                                                                                                                        out on about a
                                                                  0.5                                                                                                                                                                   300% rally since
                                                                                                                                                                                                                                        this bull began
                                                  0.8                                                                                                                                                                                   in March 2009.*


                                                                                                                                                                                      LEGEND            S&P 500 daily returns (measured on a logarithmic scale)

                                                                                                                                                                                                        Market peak to loss recaptured

                                                                                                                                                                                                     O Time from market low to recapture of prior peak (years)


                                                                                                                                                                                                        Bear markets

                                                                                                                                                                                                        10% market correction

     1950   1952   1954   1956    1958   1960   1962    1964   1966     1968   1970   1972   1974     1976   1978   1980   1982   1984   1986   1988    1990     1992   1994   1996    1998   2000    2002     2004      2006       2008      2010       2012      2014       2016      2018

                                                                                                                                                                                                              *As of November 30, 2018, the S&P 500 is up 308% cumulatively since March 9, 2009.
Yield Curve May Stay Flat
                                                                      fig.5                           Due to Higher Trending Rates
                                                                                                                                                                                2-10 YEAR TREASURY YIELD SPREAD                  10 YEAR TREASURY YIELD


        chapter 3:                                                                                                                                                                                                   YIELD CURVE IS
                                                                                                                                                                                                                    CONSIDERED FLAT
                                                                                                                                                                                                                     WHEN 2-10 YEAR

                                                                                                                                                                                                                    SPREAD IS NEAR 0.

        for Bonds

                                                                      ‘90       ‘92         ‘94          ‘96          ‘98         ‘00          ‘02         ‘04          ‘06          ‘08          ‘10         ‘12          ‘14         ‘16          ‘18
                                                                                  Source: LPL Research, Federal Reserve 11/30/18; the yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but
                                                                            differing maturity dates. The yield spread is the difference between yields on differing debt instruments, calculated by deducting the yield of one instrument from another.

                                                                    positioning should still be somewhat insulated
                                                                    against rising rates, in our view, but investment-
                                                                    grade bonds look more attractive than they have
                                                                    in years, and they can continue to play a role in a
                                                                    well-diversified portfolio.
                                                                    Reading the Yield Curve
                                                                    Investors’ obsession with the flattening U.S.
                                                                    Treasury yield curve dominated headlines for
                                                                    much of 2018. A flattening yield curve occurs
                                                                    when short-term rates are rising faster than
                                                                    long-term rates, which may eventually lead to an
                                                                    inverted yield curve, where short-term rates are
                                                                    higher than long-term rates. Historically, this has
                                                                    been a negative signal for the U.S. economy,
           IT’S BEEN A CHALLENGING ENVIRONMENT                      often providing an early warning of an eventual
           for bond investors over the last several years, and      recession, which is why the yield curve has
           it all comes down to interest rates—in terms of          been garnering so much attention recently.                                                            The yield on the benchmark 10-year U.S. Treasury jumped
           rates both staying low and rising. Low rates have          We believe these concerns were overstated                                                           roughly 60 basis points (0.60%) in 2018 (as of 11/30) from
           meant less income from fixed income securities,          given the positive economic environment.                                                              2.40% to 3% [Figure 6, p.19]. Market interest rates moved
           while rising rates pushed bond prices down,              We do expect both short- and long-term rates                                                          higher as economic growth gained traction and inflation
           lowering the value of the securities.                    to gradually rise in 2019, keeping the yield                                                          measures approached the Fed’s target for price stability.
              While both low and rising interest rates will still   curve somewhat flat [Figure 5]. However, if                                                           The rising federal budget deficit also caused Treasury
           be in play in 2019, we believe the worst is likely       that continues to occur in the context of solid                                                       auction bidders to demand higher yields for the risk they
           over. The somewhat higher interest rates we have         economic growth and modest inflation, we                                                              were taking, particularly since the Fed, with the end of QE,
           now come with higher bond income; and although           don’t think a flat yield curve should be read                                                         was no longer backstopping the U.S. Treasury market. While
           we are still concerned about rising rates, we think      as a signal of rising recession risk.                                                                 rising rates are a signal of good economic growth, they can
           that upward pressure will moderate compared to             Understanding what’s driving short-term                                                             cause volatility, especially when rates periodically surge.
           what we’ve seen since mid-2016. Fixed income             rates higher provides further valuable context

                                                                                                                                                                                                                                  OUTLOOK 2019 • 16
to the yield curve. Changes in short-term
        rates largely reflect Fed policy, and in 2018,
                                                                                          HOW TO INVEST
                                                                                          We expect interest rates to continue
                                                                                                                                               valuations relative to other global sovereigns,
                                                                                                                                               the benchmark U.S. Treasury above a 3.0% rate                                           Digging
        short-term rates moved higher in anticipation                                     to rise at a moderate pace in 2019,                  often has experienced good demand when
        of gradual rate hikes. We expect the Fed to                                       but more slowly than in recent years.                compared to other, more expensive developed
        raise rates only twice in 2019, roughly in line                                   Higher-quality bonds have become                     market alternatives.

        with the consensus and the Fed’s updated                                          more attractive as rates rise, but we still             Against this backdrop, we expect near                                                Commodities may remain volatile
                                                                                          emphasize above-benchmark credit risk                                                                                                        and are unlikely to be attractive
        December guidance.                                                                                                                     flat returns for the Bloomberg Barclays U.S.
                                                                                          and below-benchmark rate sensitivity.                                                                                                        unless an upside inflation surprise
           Market forces may create conditions that                                                                                            Aggregate Bond Index. Although we do
                                                                                                                                                                                                                                       acts as a catalyst for hard assets.
        enable the Fed to pause and reassess the                                                                                               recommend generally moving closer to the
        rate hike path that best serves the economy.                                                                                           benchmark given the potential for later cycle

        These forces include the lack of threatening                                                                                           volatility, we continue to position portfolios with                                       Oil prices are likely to remain volatile
        wage pressures, delayed effects of previous                  INVESTMENT-GRADE     Economic growth may help credit-sensitive bonds;     below-benchmark interest rate sensitivity                                               in 2019, mainly because technological

        hikes, policymakers’ awareness of the                        CORPORATE BONDS      added credit risk provides incremental yield.        and above-benchmark credit risk to help                                                 innovations continue to make it challenging
        impacts of dollar strength, the impact of                                                                                              manage rising rates while positioning for                                               for markets to find a stable price range.
        balance sheet reduction, and the increase in                 MORTGAGE-BACKED      Yield benefit relative to rate risk remains
                                                                                                                                               continued economic growth.                                                              We believe West Texas crude (WTI) is still
        Treasury issuance (driven by deficit spending).
                                                                     SECURITIES           attractive among high-quality options.
                                                                                                                                                                                                                                       a fair value in the $60-per-barrel range,
        We are encouraged by the Fed’s recent
        emphasis on flexibility, which will allow it to
                                                                     INTERMEDIATE-TERM    Offer some potential diversification while           Picking a Position                                                                      and we anticipate some pickup in demand
                                                                                                                                                                                                                                       in 2019. Geopolitical risk potentially could
                                                                     HIGH-QUALITY BONDS   avoiding the rate risk of long-term bonds.           Given our expectations of rising interest rates,
        be more responsive to market conditions.                                                                                                                                                                                       provide some support for prices.
                                                                                                                                               yet at a slower pace than in recent years, here

                                                                     BANK LOANS           Still potentially attractive for strategic                                                                                                      At current price levels, we think gold can
                                                                                                                                               is a breakdown of how bond sectors may
        Breaking It Down                                                                  investors, but high issuance, weaker investor
                                                                                          protections raise some concerns.
                                                                                                                                               perform in 2019.
                                                                                                                                                                                                                                       play a role as a hedge against inflation or
                                                                                                                                                                                                                                       a sharp rise in economic uncertainty, but
        Taking all of these factors into account, we                                                                                           U.S. TREASURIES: U.S. Treasuries do have high                                           right now we don’t see either of those as
        anticipate gradually increasing interest rates               HIGH-YIELD           May be supported by further economic growth,         interest rate sensitivity, meaning that a sharp                                         looming factors. In addition, more attractive
        as U.S. economic growth moderates from                       BONDS                but we prefer a combination of equities and          rise in rates could have a large and negative                                           yields from other investments increase the
                                                                                          high-quality bonds.                                                                                                                          opportunity cost of holding gold, and the
        the strong pace of 2018. Consequently, we                                                                                              impact on total return. However, we believe
        expect the 10-year Treasury yield to eventually                                                                                        it is important not to fully abandon this fixed                                         potential for the dollar to at least hold at
        trade within a range of 3.25–3.75% in 2019.
                                                                     DEVELOPED            Valuations remain very rich and declining
                                                                                                                                               income sector, because U.S. Treasuries can help                                         its current levels removes some support for
                                                                     INTERNATIONAL        central bank accommodation may create a

        We may periodically see spikes above or                                                                                                provide portfolios with diversification, income,                                                      going for the gold.
                                                                     BONDS                challenging environment.
        drops below, but we suspect the bulk of time                                                                                           and liquidity, and can help smooth out volatility                                                        Industrial metals may benefit
        will be spent within this range, as domestic                 LONG-TERM HIGH-      With rates still expected to rise, diversification   during periods of equity market stress.                                                               from fiscal efforts to spur
        and global investors attempt to find balance                 QUALITY BONDS        benefit does not adequately compensate for                                                                                                                 growth; however, demand from
                                                                                                                                               MUNIS: Despite 2017 tax cuts potentially                                                              China could continue to diminish
        among Fed guidance, U.S. Treasury issuance,                                       added rate sensitivity.
                                                                                                                                               weighing on demand, municipal securities
        wage pressures, and relative valuations with                                                                                                                                                                                                 as its economy transitions from
        other sovereign bonds.                                                                                                                                                                                                                       manufacturing toward services
           Tying back to the yield curve, the demand                                                                                                                                                                                                 and consumption. With global
        for U.S. Treasuries also points to the yield                                                                                                                                                                                                 growth unlikely to accelerate,
        curve remaining flat. Because of its attractive                                                                                                                                                                                              upside may be limited.

        We expect the 10-year
                                                                                                                                                                                    RATES MOVE                     Stronger than expected
                                                                                                                                                                                                                   economic growth
                                                                                                                                                                                                                                                            If we see rapidly
                                                                                                                                                                                                                                                            rising rates, bond

        Treasury to spend the                                                                                                                                                       SHARPLY
                                                                                                                                                                                                                                                            performance will
                                                                                                                                                                                                                   A tightening job market                  likely suffer and
                                                                                                                                                                                                                                                            borrowing costs
                                                                                                                                                                                    HIGHER?                        Competition for labor pushing

        bulk of 2019 in the
                                                                                                                                                                                                                                                            would increase,
                                                                                                                                                                                                                   up wages significantly
                                                                                                                                                                                                                                                            creating a challenge
                                                                                                                                                                                      Several factors could        Companies raising prices to              for consumers and
                                                                                                                                                                                    indicate that interest rates                                            businesses. We may

        range of 3.25–3.75%.
                                                                                                                                                                                                                   offset tariff costs
                                                                                                                                                     W H AT I F. . .                may experience a sharper                                                also see heightened
                                                                                                                                                                                                                   Rising inflation expectations
                                                                                                                                                                                    increase than expected:                                                 stock market volatility.

        17 • OUTLOOK 2019                                                                                                                                                                                                                                       OUTLOOK 2019 • 18
Although Rates Are Climbing,
           fig.6                   Increases Have Been Gradual                                                                        chapter 4:
                                   10 YEAR TREASURY YIELD

3                                                                                                                                                                                                                                             4

                                                                                                                                      in the Stock



         1%             CHANGE                        CHANGE              CHANGE                            CHANGE

        .5%             0.10                          0.18               -0.05                               0.61
               2015                     2016                   2017                        2018
                                                                                     Source: LPL Research, Federal Reserve 11/30/18   Potential
        performed better than we anticipated. We still                rates. We still prefer bank loans to high yield, but
        view tax-exempt fixed income as relatively                    given our bias toward quality, we recommend
        attractive for suitable investors.                            only marginal exposure for suitable investors.

        MBS: Mortgage-backed securities (MBS) have                    INTERNATIONAL: Developed market sovereign
        a history of strong performance during periods                bonds continue to look expensive to us. Central
        of rising rates as prepayment risk diminishes.                bank policy has made yields unattractive and
        Mortgage supply has been weaker than expected                 rising rates may become an additional challenge
        in 2018, while the period of slow curve flattening            as the European Central Bank reduces its
        helped minimize volatility in the space. Despite              monthly asset purchase program. Emerging
        expectations that rising rates will moderate,                 market debt (EMD), denominated in dollars,
        we believe adding MBS over the coming year                    looks attractive when considered through the
        may help provide added diversification.                       lens of relative valuation. EMD spreads are

                                                                      currently at a slight premium to high yield,
                                                                      compared to history, and appear poised to
                                                                                                                                                                                          Tracking This Bull
        move into the later part of the business cycle,                                                                                                                                   The current bull market is officially the longest
                                                                      rally in the coming quarters.
        we are increasing our focus on investment-grade                                                                                                                                   in history, and the economic expansion is
        (IG) fixed income, with a modest allocation                                                                                                                                       quickly approaching that milestone as well—it’ll
        to high yield only for strategically oriented
        investors. High yield historically provides extra
                                                                      Chapter Summary                                                                                                     be the longest expansion ever as of May 2019
                                                                                                                                                                                          [Figure 7]. So what does age have to do with
                                                                      While the 37-year-old bull market in bonds may
        return for the greater risk it carries and typically                                                                                                                              it? Considering that on average the typical bull
                                                                      be over, we’re not convinced a full-on bear
        outperforms during periods of rising rates;                                                                                                                                       market and expansion last approximately 5
                                                                      market has begun. The income-generation
        however, we believe IG corporates may provide                                                                                 CONSIDERING OUR VIEWS ON ECONOMIC                   years, reaching the 10-year mark is quite a feat.
                                                                      (coupon clipping) phase of the credit cycle may
        some of the potential benefits of the added                                                                                   growth, monetary policy, and the fiscal tailwinds   But for those who are concerned that the cycle
                                                                      last longer than in previous experiences, given
        credit exposure while avoiding some of the                                                                                    of government spending, reduced regulation,         has gone on too long, there is some interesting
                                                                      the extent of monetary policy accommodation
        risk of high yield. Up to half of the sector now                                                                              and lower taxes, we expect 2019 to be a good        context to consider. Assuming the start of
                                                                      over the past decade. Nonetheless, we
        carries a rating of BBB—essentially one notch                                                                                 year for stocks. Market volatility will likely      the current bull market began after the lows
                                                                      acknowledge that it will prove more difficult to
        away from being categorized as high yield.                                                                                    persist, as investors digest the many forces        achieved in March 2009, then it is the longest in
                                                                      make money in bonds going forward, as a variety
        As a result, IG bonds may offer the potential                                                                                 impacting the economy, interest rates, and          duration, but not magnitude.
                                                                      of trends conspire to push market interest rates
        to exceed their average performance during                                                                                    corporate profits. We also believe that during         While the current bull market has exceeded
                                                                      higher. Therefore, for diversified fixed income
        previous periods of rising market interest rates.                                                                             volatile periods, investors must focus on the       the 10-year life of the 1990s bull, that period
                                                                      portfolios, we will try to employ active strategies
                                                                                                                                      fundamentals supporting earnings, interest          generated returns in excess of 400%, compared
        BANK LOANS: Bank loans carry below                            to identify fixed income investments that may
                                                                                                                                      rates, valuations, and income, and remember         to the current more than 300% return. Yet in
        investment-grade credit risk but have been a                  perform better in an environment of rising rates,
                                                                                                                                      the importance of diversification.                  late summer and early fall of 2011, the S&P 500
        popular choice to insulate portfolios against rising          dollar strength, and fiscal stimulus.

        19 • OUTLOOK 2019
Index fell by 19.9%. Some could suggest we’re
         splitting hairs here, but it sure felt like a bear
                                                                                                       In reality, we can’t say for sure how long
                                                                                                     this bull will keep running, but given the
                                                                                                                                                                                      HOW TO INVEST
                                                                                                                                                                                      Our expectations for equity market leadership in 2019 are based on our forecast
                                                                                                                                                                                      for solid but slightly slower growth in the U.S. and global economies and
         market! Another factor to consider is that stock                                            fundamentals of the U.S. economy and                                             corporate profits, tighter monetary policy, and a gradual rise in interest rates.
         prices, as measured by the S&P 500, did not                                                 corporate America, we believe the odds

         make new highs again until 2013, which would                                                favor solid potential gains for stocks next year.
         indicate the current bull is not nearly as old as
         originally thought.
            Though volatility is a characteristic of a late
                                                                                                     Breaking It Down                                                CYCLICAL         Favor cyclical sectors over defensives as the economic expansion is likely to continue through
         cycle stock market environment, in our opinion,                                             After watching tax reform boost S&P 500                         STOCKS           2019. Industrials are poised to benefit from resolution of the U.S.- China trade dispute, technology
                                                                                                                                                                                      may continue to deliver strong earnings growth, and financials appear attractively valued.

         corporate profitability is the most important                                               operating profit growth to over 20% in 2018,

         determinant of equity prices, followed by interest                                          we believe the pace of earnings gains will
                                                                                                                                                                     VALUE            Value may benefit from solid U.S. economic growth and relatively attractive valuations
         rates. Though profits rose by approximately 25%                                             moderate in 2019 to 6–7%, essentially in line                                    after a sustained period of growth outperformance.
         in the first three quarters of 2018, and growth                                             with historical averages. This would bring index
         of more than 20% is expected for the full year                                              profits to $172.50 in 2019, up from roughly                     EMERGING         Emerging markets may benefit from solid economic growth, favorable demographics, attractive
         based on FactSet consensus estimates, concerns                                              $162 per share that we expect for 2018. These                   MARKETS          valuations, and prospects for a U.S. trade agreement with China.
         have escalated that profits have peaked. Investors                                          estimates could prove conservative depending
         must make the distinction that, while the rate                                              on clarity on trade and the path of interest rates              U.S. STOCKS      Fundamentals are positive for U.S. stocks amid a solid economic and corporate profit backdrop.
         of growth in profits may have peaked, absolute                                              and commodities prices.                                                          Suitable investors may consider dedicating the majority of equity allocations to the U.S.
         profits remain at record levels and are expected                                              Given our belief that the Fed will raise
                                                                                                                                                                     U.S. DEFENSIVE   Defensive sectors are likely to lag their more cyclical counterparts as the economic expansion
         to rise. Also, a look back at the past 10 profit                                            rates more slowly in 2019, with the economy
                                                                                                                                                                     STOCKS           and bull market continue, potentially pushing interest rates higher.
         cycles reveals that after a peak in the year-over-                                          expected to generate 2.25–2.5% inflation,

         year profit growth rates, it has taken about four                                           we believe a price-to-earnings ratio (PE) for
                                                                                                                                                                     GROWTH           After a sustained period of strong performance compared with value, the growth stock
         years before the economy slipped into recession.                                            the S&P 500 of 17.5 times trailing earnings is                                   rally may be due for a pause. We favor the biggest value sector, financials, over the biggest
         Perhaps more important, equity prices climbed                                               appropriate. Thus, we believe the S&P 500                                        growth sector, technology.
         by an average of more than 50% during that
         intermediate period. Clearly, peak profit growth                                                                                                            DEVELOPED        Growth in Europe has been slowing and may not reach 2% in 2019, while political uncertainty
         does not indicate the cycle is nearing its end.                                                                                                             INTERNATIONAL    is high. Growth in Japan is also slowing despite stimulus and corporate reform efforts.

                                        Economic Expansions
           fig.7                        & Bull Markets
           CURRENT       LENGTH OF ECONOMIC EXPANSIONS                                            LENGTH OF BULL MARKETS
                              SINCE WWII (MONTHS)                                                   SINCE WWII (MONTHS)
                                                                                                                                                                                                          LET’S RECAP
         80                                                                                                                                                                                               In our Outlook 2018 publication, we discussed the possibility of increased volatility ahead.
                                                                                                                                                                                                          To be sure, market volatility escalated in early February, after a strong start to the year, as
                                                                                                                                                                                                          monthly wage growth climbed higher than expected. Market interest rates jumped and
                                                                                                                                                                                                          equity prices dropped, experiencing their first correction (a 10% fall from the market’s
                                                                                                                                                                                                          previous high). Stocks and rates tried to stabilize for several weeks before tariff concerns
         40                                                                                                                                                                                               escalated, and stocks again dropped about 10% in late March through early April.
         30                                                                                                                                                                                                  An essentially flat market persisted throughout the second quarter. In early summer,
         20                                                                                                                                                                                               the U.S. administration began to make progress on trade, which reassured investors, and
          10                                                                                                                                                                                              the S&P 500 Index jumped more than 7% in the third quarter. Tariff concerns with China
                                                                                                                                                                                                          remained, however, and stocks experienced further volatility in the final months of the year,
               OCT   OCT MAY APR FEB NOV MAR JUL NOV MAR NOV JUN                      JUN OCT     JUN OCT MAY OCT AUG DEC           OCT OCT MAR                                                           as trade issues weighed on investor sentiment and Fed officials reiterated plans for gradual
               ‘45   ‘49 ‘54 ‘58 ‘61 ‘70 ‘75 ‘80 ‘82 ‘91 ‘01 ‘09                      ‘49 ‘57     ‘62 ‘66 ‘70 ‘74 ‘82 ‘87           ‘90 ‘02 ‘09
                                                                                                                                                                                                          rate increases following their December rate hike.
                           Source: LPL Research, NBER, FactSet 11/30/18; economic expansions are based on GDP growth, bull markets on S&P 500 returns.

         21 • OUTLOOK 2019                                                                                                                                                                                                                                                                   OUTLOOK 2019 • 22
U.S. & Emerging Markets

         would be fairly valued in the range of 3,000          supported by fiscal stimulus. We believe
         over the coming year, representing an 8–10%           financials are attractively valued and remain well
         return from levels heading into December
         (2760 as of 11/30/18).
                                                               positioned to benefit from steady economic
                                                               growth and deregulation efforts. Finally, we
                                                                                                                                                 Lead Earnings Growth
                                                                                                                                                EARNINGS GROWTH                  U.S.       DEVELOPED INT’L         EMERGING MARKETS
                                                               expect technology to continue to deliver strong


         Picking a Position                                    earnings growth and enable productivity gains
                                                               for corporate America.
         Against a backdrop of steady economic growth,         EMERGING VS. DEVELOPED MARKETS: We
         strong corporate profits, and a rising rate           favor EM equities over developed international       20%
         environment, here is a high-level look at our views                                                                                                                                                                                          W H AT I F. . .
                                                               equities for their solid economic growth

         when it comes to positioning for 2019.                trajectory, favorable demographics, attractive
         LARGE VS. SMALL CAPS: Small caps generated            valuations, and prospects for a U.S. trade
         outperformance early in 2018, aided by being          agreement with China, with a bias toward
                                                               emerging Asia. Growth in Europe has been
         relatively more insulated from trade tensions
         than large caps. However, as trade issues             slowing and may struggle to reach even 2%
         mitigate, the business cycle ages, and the            in 2019, while growth in Japan is also lagging,
                                                               despite stimulus and corporate reform efforts.        0%                                                                                                                         Although we expect corporate
         dollar’s uptrend potentially hits resistance,
                                                                                                                                                                                                                                              profits and a steady economy
         market leadership may shift back toward               GDP growth in China and broader EM may more
                                                                                                                                                                                                                                              to support stocks in 2019, there
         large caps. In addition, a rising interest rate       than double the pace of developed international
                                                                                                                                                                                                                                              are a few potential scenarios
         environment, potentially with tightening financial    economies in 2019, supporting better earnings
                                                                                                                                                                                                                                              to watch for:
                                                               growth, and we believe political uncertainty is      -10%
         conditions, may create a challenge for small cap
         companies that have higher costs of capital and       actually lower in EM than in Europe [Figure 8].                                                                                                                                Margin pressure increases
         a greater reliance on debt. Accordingly, over                                                                                                                                                                                        sharply, hurting profits
         the next several months, we suggest suitable
         investors shift toward target allocations across
                                                               Chapter Summary                                      -20%
                                                                                                                            ‘12          ‘13          ‘14            ‘15            ‘16            ‘17            ‘18E           ‘19E
                                                                                                                                                                                                                                              Trade risk escalates
         market capitalization with benchmark-like             Overall, we do expect that 2019 may be a good                                                                                                                                  Global economy slows
                                                                                                                                                     Source: LPL Research, FactSet 11/30/18; indexes: S&P 500 (U.S.), MSCI EAFE (developed
         exposures to small, mid, and large cap stocks.        year for stocks, with the potential for 8–10%                                                                                                                                  more than expected
                                                                                                                                                        international), MSCI EM (emerging markets). Estimates may not develop as predicted.
                                                               returns for the S&P 500. Like 2018, however,                                                                                                                                   Business and consumer
         GROWTH VS. VALUE: We maintain our
                                                               we expect volatility to remain as the business                                                                                                                                 spending slow significantly
         slight preference for value despite its
                                                               cycle ages. We recommend investors weather
         underperformance relative to growth in 2018.
                                                               these ups and downs by focusing on the                                                                                                                                         Should these circumstances
         We expect value in 2019 to benefit from the
                                                               fundamentals and diversifying portfolios where                                                                                                                                 arise, stocks could be negatively
         pickup in economic growth that began in mid-
                                                               appropriate. We believe stocks may find support                                                                                                                                impacted. It is during these
         2018, relatively attractive valuations after a
                                                               from continued steady growth in the U.S.                                                                                                                                       challenging times when we
         sustained period of growth outperformance,

                                                                                                                                                                  The Dollar
                                                               economy and corporate profits as the impacts                                                                                                                                   have to be mindful that we
         and our positive view of financials.                                                                                                                                                                                                 don’t react emotionally and
                                                               of fiscal stimulus continue to flow through. We
         SECTORS: We favor cyclical sectors over               will continue to look for any signs of weaker                                                                                                                                  sell stocks when they’ve hit
         defensives, specifically cyclical value, as we
         expect the economic expansion to continue
         through 2019. Industrials are poised to benefit
                                                               economic or profit growth that could drag stock
                                                               prices lower. Potential escalation in U.S.-China
                                                               trade tensions, including more and higher
                                                                                                                                                                  Winds Down
                                                                                                                                                                     Given our thoughts on monetary policy for 2019, we
                                                                                                                                                                                                                                              a bottom.
                                                                                                                                                                                                                                                 Diversified portfolios may
                                                                                                                                                                                                                                              help navigate these challenging
                                                                                                                                                                                                                                              environments. Asset classes
         from resolution of the U.S.-China trade dispute       tariffs, remains a key risk to corporate profits                                                      believe the bulk of the dollar’s advance is behind us.
                                                                                                                                                                     We are less sanguine on the dollar longer term given                     that may provide diversification
         and a potential pickup in capital spending,           and therefore global stock markets in 2019.                                                                                                                                    benefits during a challenging
                                                                                                                                                                     structural forces such as federal deficit spending.
                                                                                                                                                                                                                                              period, such as high-quality
                                                                                                                                                                                                                                              bonds, defensive equity sectors,

         Although volatility will                                                                                       Given our thoughts on monetary policy for 2019, extended dollar positioning by institutional traders,
                                                                                                                      and uncertainty about trade, we believe the bulk of the dollar’s advance is behind us. To the degree
                                                                                                                                                                                                                                              and alternative strategies often
                                                                                                                                                                                                                                              look very unattractive when

         persist, we expect 2019
                                                                                                                                                                                                                                              markets are rising. Position
                                                                                                                      that U.S. economic growth exceeds forecasts and global policy remains largely accommodative,
                                                                                                                                                                                                                                              for the expected environment,
                                                                                                                      modest upside is possible in the coming year. As a result, the dollar may not provide much support to                   but realize you don’t need
                                                                                                                      those asset classes that benefit from its decline, nor do we expect any potential dollar advance over

         may be a good year for stocks.
                                                                                                                                                                                                                                              everything in a portfolio all the
                                                                                                                      the full year will be much of a headwind for dollar-sensitive assets. Longer term, our position is less                 time. Diversification still matters.
                                                                                                                      sanguine for the greenback given federal deficit spending and structural trade imbalances.

         23 • OUTLOOK 2019                                                                                                                                                                                                                                OUTLOOK 2019 • 24
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